Has Regionalism Delivered for Developing Countries?
Chapter 2: The Theory of Preferential Trading Arrangements: An Overview
INTRODUCTION It is a standard result of international trade theory that free trade maximizes global efficiency in a distortion-free world. All Pareto-efficient conditions are met; free trade is the ‘first-best’ solution. However, a world ridden by multiple distortions (such as, tariffs, quotas and exchange controls) does not necessarily move closer to Pareto optimality by the removal of one distortion. Some Pareto-efficient conditions will be satisfied, but others may be disturbed because of the change. The net result could be either a gain or a loss relative to the status quo; a priori we cannot determine which. This is the fundamental result of the ‘general theory of second best’. The formation of a free-trade area involves such a trade-off of distortions. It eliminates tariffs between member states and, therefore, establishes an undistorted price relationship between the home and partner countries. But there is a perversion in price relationships between partner and non-partner countries, as the latter are discriminated against. The net welfare effect is ambiguous, and cannot be determined a priori. It is, therefore, necessary to investigate the conditions under which a freetrade area (FTA) or a customs union (CU)1 represent a movement toward the Pareto optimum, that is, free trade. This chapter reviews theoretical models that attempt to answer this question. For consistency with the literature, we refer here mostly to CUs, but the effects of an FTA are similar. The next section begins by outlining the logic of the pre-Vinerian analysis of the effects of CUs, followed by...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.